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Bogle: Don't Try to Time Factor Investing

Christine Benz

Note: This video is part eight of nine of an interview between Morningstar's Christine Benz and Jack Bogle, founder of Vanguard, at the 2018 Bogleheads conference. Watch the other segments here.

Christine Benz: That leads nicely to my next question, which is about a subset of exchange-traded funds, the strategic beta funds. And they're not necessarily ETFs. In fact, yesterday you said that in some ways the Vanguard growth and value indexes were the first strategic beta or smart beta products. What's your take on those products? Useful, not so useful?

John C. Bogle: That's a complicated question, but let me just say this for the record. Morningstar counts them as factor funds or strategic beta funds, and they happen to be these funds I created in 1993; happen to be the oldest and largest strategic beta funds. How can that be since I don't believe in factor investing? The answer is pretty easy. 

I didn't create them to be traded with one another. I created them with the growth fund to be bought during your accumulation phase, where you have less taxable income and maybe a little more volatility, and then when you get to the distribution phase of your retirement account, you've got more income and a little less volatility; not very complicated. I warned investors in two consecutive annual reports: Don't trade them. Then I said, the most likely thing is that in the long term, both growth and value will have the same return. Well, 25 years later, growth and value funds both had a 9.1% return. You can't get an awful lot closer than that.

Benz: Right.

Bogle: Yet the average investor got, I think, a 7% return--the investor now, not the fund--in the growth fund, then 7% in the growth fund, I think, and 5% in the value fund--something like that. I may have the numbers a little bit off. Investors lagged, and if you accumulate that over 25 years, that lag is enormous. Investors did what I told them not to do--I told them not to do it, Christine--traded to their own disadvantage. 

I feel so funny as I don't believe in factor funds. I believe factors come and go. I believe that the coming and going of a factor cycle is unpredictable, and the record I think pretty much bears me out.

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